Bankruptcy: authority for the constitutional right of a federal agency? (Jarkesy v. SEC)

There is a new opinion from the US Circuit Court on a person’s right to a jury trial, when sued by the Securities and Exchange Commission before one of its administrative judges.

And guess what:

  • the legal authority most cited in this opinion is [ . . . drumroll . . . ] a notice of bankruptcy from the United States Supreme Court: Granfinanciera versus Nordberg, 492 US 33 (1989); and
  • the Jarkesy vs. SEC notice specifically names Granfinanciera no less than 39 times.

Why?

Why would a bankruptcy notice be the primary authority for an administrative agency matter?

Here’s why:

  • when the United States Supreme Court first addressed (in 1982) the constitutionality of the judicial authority of bankruptcy judges, under the Bankruptcy Code, it applied a legal theory called the public rights doctrine (Fn. 1); but
  • until now, the public rights doctrine has applied exclusively to federal administrative agencies—both to justify and limit the judicial authority of their administrative judges.

Double

In 1989, the Supreme Court of the United States redoubled its efforts, Granfinancieraapplying the public rights doctrine to jury trial rights for private parties sued in bankruptcy courts.

Still . . . the Supreme Court applies a bankruptcy doctrine designed specifically for actions by federal agencies against private persons.

Problem—Government as a Party

In an action within a federal agency, the federal government is almost always involved:

  • the agency sues a private party to enforce its own regulations; and
  • the suit is before the agency’s own administrative judge.

It’s normal to have such a lawsuit (according to the US Supreme Court) when the agency is upholding public rights. But it’s not acceptable to do such a thing, when private rights are at stake – it violates Article III of the US Constitution.

—A bankruptcy problem

A problem with applying the public rights doctrine to bankruptcy litigation is that the federal government is rarely a party.

In bankruptcy litigation:

  • the debtors are not the federal government;
  • the trustees are not the federal government;
  • most creditors are not the federal government; and
  • US trustees are part of the federal government. . . but are not a primary adversary in most bankruptcy contexts.

—Judge Scalia

Justice Scalia emphasizes this problem of government as a party, for the doctrine of public rights in bankruptcy. He does so in concurring or dissenting opinions, beginning with Granfinanciera:

  • referring to the “long-held principle that the doctrine of public rights requires, at a minimum, that the United States be a party to the judgment” (492 US at 70).

Entry into bankruptcy

The doctrine of public rights enters the field of bankruptcy by the plurality opinion of 1982 (by only four judges). If he had received one more vote, this opinion and his doctrine of public rights would have declared the entire Bankruptcy Code unconstitutional. [See fn. 1]

The effect of the public rights doctrine (from this view) is to greatly limit the authority of bankruptcy judges.

An alternative view

Let’s go back to the Northern Pipeline opinion (see fn. 1) and consider another view, offered by three dissenting judges.

This dissenting opinion rejects the doctrine of public rights.

It also declares that the new bankruptcy courts (established by the Bankruptcy Code) are constitutional. It’s because:

  • extensive provision is made in the Bankruptcy Code for appellate review of bankruptcy court decisions by Article III courts;
  • no one seriously claims that Congress attempted, in enacting the Bankruptcy Code, to elevate itself above the other branches of government or to undermine the authority of constitutional courts generally; and
  • a specialized court is needed to deal with bankruptcy cases – this is because the strains on the old bankruptcy system due to the dramatic increase in bankruptcy cases is clearly an issue for Congress to deal with (458 U,S . at 116-17).

-To imagine

Imagine what bankruptcy would have looked like from the other perspective:

  • the jurisprudential nightmare created by the doctrine of public rights would have been avoided; and
  • our life in the world of bankruptcy would have been much better and more logical, practical, efficient and predictable.

-Reality

Instead, we got a lack of clarity, as explained by a concurring opinion in Wellness International v Sharif:

  • “Our cases examining the constitutionality of laws granting power to bankruptcy courts have failed to consider the source of congressional authority to establish them”; but
  • “The obvious textual basis is the fourth clause of Article I, §8, which empowers Congress to “establish . . . Uniform bankruptcy laws throughout the United States.

Reasons for such a lack of clarity include:

  • the doctrine of public rights has no place in bankruptcy;
  • the imposition of this doctrine on bankruptcy law by the US Supreme Court has created confusion and uncertainty; and
  • no one can articulate a justification for the authority that bankruptcy courts and their judges actually have.

Conclusion

New Jarkesy vs. SEC The opinion, involving administrative actions by the Securities and Exchange Commission, is a new and fresh reminder of the public rights nightmare imposed on the bankruptcy world by the United States Supreme Court, almost accidentally.

Here, hoping for the alternative analysis presented in the Northern Pipeline Dissent had prevailed!

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